Duxton Water Ltd (ASX: D2O) could be the best ASX small cap to buy in the current market conditions.
It's a company which invests in water entitlements and leases those water rights to agricultural businesses.
Here are three reasons why it could be a good buy today:
Linked to agriculture sector
The Australian agriculture sector is predicted to have good growth potential because it's the Asian food bowl. Not only is the Asian population growing, but food tastes are also changing to include quality Aussie-grown produce.
Owning water rights that are leased to agricultural players could be a good way to profit indirectly from this tailwind with less volatility.
Boosted by the current drought
The current dry conditions are increasing the value of water entitlements. That's why Duxton Water has been able to achieve a return of around 23.6% over the past year for shareholders through the growth of its net asset value per share (NAV) and franked dividends.
According to Duxton, strong winds and dry soils increased evaporation and reduced inflows into major storages, which were 60% below the long-term median. Total active storage within the Murray Darling Basin (MDB) was reduced by a further 4% during November to 51%.
Growing cashflow
Not only is Duxton Water increasing its water portfolio asset value, but it's steadily growing the income derived from those assets.
For shareholders, this is turning into a steadily growing dividend. It started with a 2.3 cents per share dividend a year ago, increased it to 2.4 cents per share a half-year ago and recently paid a 2.5 cents per dividend.
Slow and steady dividend growth combined with long-term capital growth is a great combination for a defensive asset.
Foolish takeaway
It currently offers a partially franked dividend yield of 3.8% and is trading at a 6% discount to the NAV of $1.37 reported at the end of November 2018.
Duxton Water could be a good way to escape the market volatility and achieve alternative pleasing total returns. However, it's unlikely to be one of those shares that destroys the ASX index's return unless the ASX has a bad run.
